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Romania’s Economic Program Supported by the IMF, EU, World Bank, and

other IFIs by

Tonny LybekIMF’s Resident Representative in Bulgaria and Romania

tlybek@imf.org

at

Norwegian Cooperation ProgramBucharest

December 4, 2009

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Agenda

I: World Economic Outlook– Uneven signs of recovery but no time for

complacency

II: Regional Economic Outlook– From excessive credit growth to a credit crunch

III: Romania’s Economic Program

IV: Conclusion

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I.1 The Global Crisis Deepest global recession since the

1930’s: In 2009, world growth is expected to decline

(1.1 percent) for the first time in 60 years! International trade declined

How long will it last? Financial shock No obvious locomotive Positive signs, but no time for complacency!

Normalization of activity, re-stocking Unemployment and Non-performing loans

lagging Cautious exit of anti-crisis programs

(http://www.imf.org/external/np/g20/110709.htm)

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I.2 World Economic Outlook

2007 2008Time of projection: April June Sep April June Sep

World output 5.2 3.0 -1.3 -1.4 -1.1 1.9 2.5 3.1

Advanced economies 2.7 0.6 -3.8 -3.8 -3.4 0.0 0.6 1.3 United States 2.1 0.4 -2.8 -2.6 -2.7 0.0 0.8 1.5 Euro area 2.7 0.7 -4.2 -4.8 -4.2 -0.4 -0.3 0.3 Germany 2.5 1.2 -5.6 -6.2 -5.3 -1.0 -0.6 0.3 France 2.3 0.3 -3.0 -3.0 -2.4 0.4 0.5 0.9 Italy 1.6 -1.0 -4.4 -5.1 -5.1 -0.4 -0.1 0.2 Spain 3.6 0.9 -3.0 -4.0 -3.8 -0.7 -0.8 -0.7 Japan 2.3 -0.7 -6.2 -6.0 -5.4 0.5 1.7 1.7 United Kingdom 2.6 0.7 -4.1 -3.8 -4.4 -0.4 0.1 0.9 European Union 3.1 1.0 -4.0 -4.6 -4.2 -0.3 -0.1 0.5

World trade volume 7.3 3.0 -11.0 -12.2 -11.9 0.6 1.0 2.5 Imports of advanced economies 4.7 0.5 -12.1 -13.5 -13.7 0.4 0.6 1.2 Imports of emerg. & dev. countries 13.8 9.4 -8.8 -9.6 -9.5 0.6 0.8 4.6 Exports of advanced economies 6.3 1.9 -13.5 -14.9 -13.6 0.5 1.3 2.0 Exports of emerg. & dev. countries 9.8 4.6 -6.4 -6.5 -7.2 1.2 1.4 3.6

Source: Table 1.1 in World Economic Outlook, April 2009; Table 1 in World Economic Outlook Update , July 2009,

IMF; and Table 1.1 in World Economic Outlook, October 2009 , IMF.

2009 2010

Real GDP and World Trade, Annual Change in Percent

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II.1 Central and Eastern Europe

The Good Times 2003–07—Catching-up: Vulnerabilities were building-up!

Private sector imbalances growing rapidly!– Increasing current account deficits– Increasing exposures to Western banks

Public finances looked much better than they were! Convergence process not fully appreciated!

Crisis came late to the region: Initial denial made it difficult to take early

action! The five stages: Denial -> Resentment -> Bargaining -> Depression -> Acceptance!

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II.2 Impact of The Global Crisis

Shock I: Lower external demand Shock II: Slowdown in capital inflows:

Foreign direct investment (FDI) Funding of—mainly foreign-owned—banks! Direct borrowing by non-financial companies

Slow-down in domestic demand: Delaying investments, particularly construction Uncertainty about employment Slower wage growth and lower remittances Wealth effects (asset prices)

Some already ripe for a home-grown crisis: Imbalances differed among CEE countries Cushions differed among countries IMF has tried to stress differences in the region!

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II.3 Vulnerabilities and Severity of Recessions

Have Varied

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II.4 Regional Economic Outlook

2007 2008Time of projection April June Sep Nov April June Sep Nov

Baltics Estonia 7.2 -3.6 -10.0 … -14.0 … -1.0 … -2.6 … Latvia 10.0 -4.6 -12.0 … -18.0 … -2.0 … -4.0 … Lithuania 8.9 3.0 -10.0 … -18.5 … -3.0 … -4.0 …

Central Europe Hungary 1.2 0.6 -3.3 … -6.7 … -0.4 … -0.9 … Poland 6.8 4.9 -0.7 … 1.0 … 1.3 … 2.2 …

Southeastern Europe Bulgaria 6.2 6.0 -3.5 -7.0 -6.5 … -1.0 -2.5 -2.5 … Croatia 5.5 2.4 -3.5 … -5.2 … 0.3 … 0.4 … Romania 6.2 7.1 -4.1 -8.0 -8.5 -7.8 0.0 1.7 0.5 0.5

Source: Table 2.4 in World Economic Outlook, April 2009; Table 1 in World Economic Outlook Update ,

July 2009, IMF; and Table A4 in World Economic Outlook, October 2009, IMF.

2009 2010

Real GDP, Annual Change in Percent

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III.1 Romania: A Case in Point

Global crisis made it increasingly difficult to secure external financing: Large short-term private debt

Large fiscal imbalances even in good years, make financing challenging during a recession

=> Emerging credibility problem!

=> In need of a “safety belt”!!

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III.2 Romania’s Package

Joint package supporting Romania’s program!

Size of the “safety belt” (€20 billion over 2 years): IMF*: May 4; 24-month Stand-By Arrangement with exceptional

access €12.95 billion (1110.77% of quota). Interest rate about 3½% and repayment over 3–5 years.

EU**: May 5; ECOFIN Council approved the framework for a €5 billion loan, a maximum of five installments over 24 months (on top of pre-and post-accession funds and the advance payment of structural funds in 2009). Interest rate is libor + spread and an “average maturity of maximum 7 years”.

World Bank**: 2009–10, 3 DPLs of total €1 billion. Interest rate will depend on the maturity, currency, and if fixed or floating rate.

EBRD and other multilateral IFIs (EIB): various projects, about €1 billion.

* Half of second tranche to help finance the budget deficit** Budget support

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III.3 Romania’s Economic Program

A: “European Bank Coordination Initiative”: foreign- owned banks remain committed to Romania!

B: Government addresses fiscal imbalances: Fiscal consolidation: ensure sustainability! Improve fiscal governance: ensure predictability!

C: NBR continues to maintain sound banking system: Ensure prompt and early action

D: Price stability remains primary objective of monetary policy (inflation-targeting)

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III.4 Secure External Financing Potential financing gap:

Current account deficit Capital account

Roll-over assumptions Reserves to exceed 100% of short-term debt!

European Bank Coordination Initiative: Nine largest foreign-owned banks committed

to: (i) maintain exposure to Romania, and (ii) increase capital in line with stress tests:

Vienna meeting on March 26, 2009 Brussels meeting on May 19, 2009 Bucharest meeting on August 6, 2009 Brussels meeting on November 18, 2009

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III.5 Ensure Fiscal Sustainability Budget deficits: March adjustment 1.1% of

GDP August adjustment 0.8 % of

GDP March August 2009 -4.6% -7.3% 2010 -3⅔% -5.9% 2011 better than-3% -4.3%

Public salaries Protect most vulnerable groups Arrears of general government Government guarantees

Balance following factors: Back on a sustainable path Realistic financing Avoid excessive cuts exacerbating the recession

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III.6 Ensure Fiscal Predictability

Improve tax administration Restructuring of the public agencies Increase accountability of local authorities Better monitoring and control of public

enterprises *“Unitary Public Pay Law”:

Simplified pay scale, reduce reliance on bonuses More transparent Equity Save resources *Implementing legislation to be adopted in 2010!

*“Fiscal Responsibility Act” *Pension Reform * New legislation

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III.7 Fiscal Responsibility Law

Objective: achieve and maintain medium-term fiscal discipline! Further improve transparency and responsibility

Coverage: entities fully or partially financed through the consolidated general budget: Also local governments and self-financed units

Multi-year fiscal framework: rolling 3-year fiscal strategy submitted to Parliament in May: Ensure predictability New expenditure proposals to show fiscal impact

and revenue sources

Independent fiscal council

Submitted to Parliament by end-November√

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III.8 Pension Reform

Objective: ensure long-term sustainability!

Broaden contribution base

Better relate pensions to contributions

Gradually index to inflation instead of wages

Retirement age: gradually increase and equalize for women and men

Draft is in good shape, although some issues to be further discussed

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III.9 Maintain Sound Banking System

Maintain strong capital buffers: Stress tests (prior action) Maintain 10 percent capital adequacy ratio

(CAR) CAR at end-September was 13.7%

In EU context, facilitate resolution procedures E.g., strengthen authority of special

administrator Strengthen deposit insurance

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III.10 Monetary Policy

Maintain inflation-targeting framework: IT-targets within official range (3.5 ±1%)

Quarterly path Review

Only gradually easing if conditions permit: Required reserves Interest rates

Maintain a floating exchange rate regime

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III.10 Selected Indicators

Real GDP, prel. -7.4% (Q1–Q3 2008 to Q1–Q3 2009)

Unemployment, reg. 7.3% (s.a. Sep 2008 to Sep 2009)

Inflation, CPI 4.3% (Oct 2008 to Oct 2009)

Exports (value in €): -18.3% (Q1–Q3 2008 to Q1–Q3 2009)

Imports (value in €): -36.0% (Q1–Q3 2008 to Q1–Q3 2009)

Industrial output: -8.5% (Q1–Q3 2008 to Q1–Q3 2009)

Housing prices, anecdotal information

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III.11 Market ReactionsEURNM CDS Spreads 5-year(In basis points)

0

200

400

600

800

1000

1200

1400

Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Bulgaria

Czech Republic

Estonia

Latvia

Lithuania

Hungary

Poland

Romania

Slovak Republic

Source: Bloomberg

September 15, 2008Lehmann Brothers files for bankruptcy

March 25, 2009 Agreement at staff level on Romania's Economic Program

April 2, 2009 G20 Statement

in London

October 1, 2009 Romania's coalition government splits

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IV Conclusion Global financial crisis is deep, but has

been mitigated by coordinated global measures! Those with smallest imbalances and largest

cushions have been least affected.

Romania’s economic program is supported by the IMF, EC, WB and other IFIs.

We continue to work closely with the Romanian authorities.

IMF documents available on www.imf.org and also in Romanian on www.fmi.ro

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Thank you very much for your attention